| Barry Rosenstein, Jana Partners (Bloomberg) |
The market’s big sell-off this week could wind up battering activist managers more than the average hedge fund, especially if the third quarter is any indication. Several activists lost money during the September period, while others barely eked out gains. As a result, many activists were already lagging the overall market or barely keeping even over the first three quarters before the market entered its current free fall.
For example, we have already reported that David Einhorn’s Greenlight Capital — which sometimes takes activist positions — lost more than 4 percent in the most recent quarter, while Barry Rosenstein’s Jana Partners fell 3 percent. As a result, both of the New York-based firms’ main funds are each up about 2.5 percent for the year, give or take a few basis points.
Richard (Mick) McGuire III’s San Francisco-based Marcato Capital Management lost 5.4 percent in September alone, which caused it to be flat for the quarter. As a result, it rose just 2.6 percent or so for the year.
Meanwhile, Nelson Peltz’s New York-based Trian Partners gained just 0.6 percent in the third quarter, while Jeffrey Ubben’s San Francisco-based ValueAct Capital Partners added 0.5 percent, putting the two funds up about 6.7 percent and 6.8 percent, respectively, for the first nine months, roughly in line with the overall market. Daniel Loeb’s New York-based Third Point, an eclectic event-driven fund that also makes macro and credit trades, was flat in the third quarter, enabling it to preserve its 6 percent gain.
Of course, there were exceptions. The best activist performer was also one of the best overall hedge fund performers — William Ackman’s Pershing Square Capital Management, which rose about 6 percent in the third quarter and finished up nearly 32 percent for the year. Keith Meister’s Corvex Management also fared well. The firm, which manages its portfolio more like that of a long-short equity firm, was up 11 percent in the first half, and according to a person with knowledge of the firm, the fund was up again in the third quarter, although it is not clear how much exactly.
Of course, this is just a snapshot of a three-month period. And activists, more than others, must be judged over a longer period of time, a belief most of their investors share, given the popularity of longer lock-up funds among this group.
Still, the rough third-quarter results are another reminder that in a volatile or declining market, activist hedge funds are not really hedged funds. They are simply long-only funds with a self-imposed catalyst.
If other investors, companies or the target company’s management don’t buy into the activist’s thesis, or if the mergers and acquisitions environment is not vibrant, activists are reduced to being managers of concentrated portfolios in companies that are not well run or efficient users of their assets or capital. At least that’s what the activists want all of us to believe, to justify their campaigns.
Otherwise, who needs them? This would make these lower-quality portfolios especially vulnerable in a market downturn. This is what happened in the 2008 market meltdown.
For example, that year Carl Icahn’s then–hedge fund Icahn Partners lost 35.6 percent, Third Point lost 32.75 percent, Jana dropped more than 23 percent and Greenlight Capital lost 22.7 percent. Jeffrey Smith’s Starboard Value and Opportunity Fund, which was very small at the time, fell 20.87 percent in 2008.
This compares with a 21.82 percent loss for the HFRI Equity Index and a 37 percent decline for the S&P 500 in 2008. Clearly, activism and event-driven strategies are not exactly low-correlation strategies.
